Archive for the ‘2009 Year-end Planning’ Category

Tax Moves for the last day of 2009

Thursday, December 31st, 2009 by Joe Kristan

There are only a few hours left in 2009. Still, it’s enough for a few year-end tax planning moves, if you hurry!
Capital losses: If you sell stock at a loss today, you can take the loss. You can deduct capital losses to the extent of capital gains, plus (if you are an individual) $3,000. This doesn’t work for short sales, which are considered closed on the settlement date, rather than the trade date; also, beware the “wash-sale” rules.
Live another day. If you survive today, but not tomorrow, you may avoid estate tax altogether, assuming you have enough assets to worry about the estate tax.
Or don’t. If your estate is under $3.5 million, maybe this is a good day to check out. Your estate will be too small to pay estate tax, but your heirs will benefit from a step-up in the basis of your assets to their date-of-death value.
Remember, the official position of the Tax Update is that there’s no good day for dying.
You also have time to make some charitable contributions, either by getting the check in the mail today or by using your credit card. If you are feeling charitable, but you don’t know what to do, here are some charities that I like:
Salvation Army
Iowa Donor Network, the Iowa organization that gathers and allocates donor organs.
Cornell College
Southern Illinois University
The Tax Foundation
Reason Foundation
Alzheimers Association
Sertoma Foundation
And don’t forget that TaxGrrrl is running in the Komen Race for the Cure. Sponsor her, or make a donation.
Update from the comments:

International Development Enterprises. All money donated to them goes towards developing techonology suitable for poorer countries, which is then sold in the free market. Water pumps, water purifiers and so on. Free market and by design self sustaining, as people have to choose to buy it.

Also, the Center for Agricultural Law and Taxation does a wonderful job. Unfortunately, they don’t have an online credit card donation page (ahem, Roger!).
If you want some more ideas, Kay Bell has a roundup of year-end tax moves.
This is the last of our 2009 year-end tax planning tips. See you next year!

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Year-end deductions: beware related parties

Wednesday, December 30th, 2009 by Joe Kristan

As the tax year winds up, businesses are busy accruing year-end expenses to get the deduction into this year. They need to be careful: if you owe money to a cash-basis “related party,” it’s not enough to accrue the expense this year. You need to pay it to deduct it.
Code Section 267 only allows a deduction to a related party “as of the day as of which such amount is includible in the gross income of the person to whom the payment is made.” That’s no problem if the “related party” is on the accrual method, because they will be accruing the income at the same time you accrue the expense. But if the related party is a cash-basis taxpayer, you have to pay.
Who is “related?” It’s a pretty wide net, but most problems arise with closely-held accrual-method businesses and their cash basis owners. If you have a C corporation, only owners of more than 50% of the stock, and their families (siblings, spouses, ancestors and descendants) are related. For pass-through entities — partnerships and S corporations — any owner is a related party, along with members of owners families and anybody related to the family members.
The broad definition of related parties for pass-throughs means that if a calendar year accrual-method S corporation accrues a bonus for a 2009 shareholder’s nephew payable in January 2010, the deduction gets deferred until 2010. The same thing applies to interest expense, rental expense, or any other expense owed to a cash-basis related party.
The year is almost over. Time to review the Tax Update’s 2009 year-end planning tips!

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Year-end planning and the Iowa School Tuition Organization Credit

Monday, December 28th, 2009 by Joe Kristan

There isn’t much time left in your 2009 year-end planning, but there is still time to save some real money this year. If you feel charitable towards private elementary schools, the Iowa School Tuition Organization Tax Credit makes makes certain donations to fund private elementary schools nearly free, after tax.
The STO credit is a 65 percent state tax credit. While there is no Iowa charitable deduction for STO donations, the federal deduction is unaffected. Here’s how it works for a hypothetical top-bracket non-AMT Iowa taxpayer (ignoring phaseouts) in dollars and cents for a $100 gift — a net cost after tax of $10.73:
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There is a catch: Iowa limits the annual amount of gifts eligible for this credit. If the credit is oversubscribed, you may not get a full credit. Your STO may be able to give you some guidance on whether there is still room for the full credit this year. Here are some to choose from:
Iowa Lutheran School Tuition Organization
SouthEast Iowa Tuition Organization
Heart of Iowa STO
Catholic Tuition Organization
While these credits may be less than ideal from a policy standpoint (the Tax Update is more of a voucher fan), you go to war with the tax law you have. If this is where your charitable inclinations lie, the Iowa STO credit makes contributions to student tuition organizations a tax-efficient way to go.
As the decade winds down, wind down with the Tax Update’s 2009 year-end tax tips!

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Playing the $13,000 Santa

Thursday, December 24th, 2009 by Joe Kristan

20091224-1.JPGIn this season of frantic giving, don’t forget the $13,000 per-donor, per-donee gift tax exclusion. Unless you have great confidence that you will die next year AND that Congress won’t restore the estate tax retroactive to January 1, 2009, anybody who is a candidate for the estate tax should consider using the gift tax annual exclusion to get money out of the estate. A couple with four kids maximizing annual giving can reduce thier taxable estates by $520,000 over five years, not even counting appreciation of the gift.
If it’s worth doing, it’s worth doing right. To get the gift to count in 2009, here are some tips:
– If you’re writing a check, march the lucky recipient down to the bank to cash it by December 31. Checks not cashed by year-end normally won’t count as 2009 gifts.
– If you are donating private company stock, make sure the corporate secretary records the transfer on the company’s books by year end. Also make sure the tax returns reflect the gift – if you make a December 25 gift of S corporation stock, make sure the donee gets a K-1 showing income for the 12/25 through 12/31 period.
– If you are donating public company stock, make sure it’s in the donee’s brokerage account before the end of the day December 31.
– If you are giving a disused sports facility, see your attorney; you can afford one.
Remember, if you miss the 2009 annual gifting exclusion, it’s gone forever. 2009 isn’t coming back.
Our 2009 year-end tax planning series concludes next week. See you then!

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The Newlywed Game, year-end tax planning edition!

Wednesday, December 23rd, 2009 by Joe Kristan

20091223-1.jpgLove is a many-splendored thing, but love is even better when it saves taxes. Your marital status at year-end is your filing status for the entire year, so maybe you want to run down to the courthouse and tie the knot before the ball drops before midnight January 1, local time. Sure, call me a hopeless romantic. The Tax Update just rolls that way.
A quick trip to the preacher may be in order in the following circumstances:
– One prospective spouse has a big capital gain, and the other has capital losses that would otherwise go unused.
– One of you has passive income, the other has passive losses. If you are married on the last day of the year, the losses can offset the income on a joint return.
– One of you has substantial income in 2009, and the other doesn’t. If you have only one income between the two of you, you’ll save taxes on a joint return because of the wider tax brackets on a joint filing.
– If you are Iowans, and one of you has pension income, marriage will enable you to exclude up to $12,000 from your Iowa income tax return. A single filer can only exclude $6,000.
There are a wide variety of other special circumstances that could lead you to tie the knot. A good tax marriage results whenever one partner has tax attributes, like capital losses, that can be used on a joint return but would not be useful on a single return. Other such items could include tax credit carryforwards and investment interest carryforwards, among others
Of course these things apply to couples pondering divorce, too, but that’s too sad to dwell on this time of year. Oops, I just did. And some couples, particularly those where both have good incomes, are better off postponing marriage, or (shudder) accelerating divorce.
Anyway, you should marry for the right reasons. But if you can both be in love and cut your taxes, why not let IRS help pay for your honeymoon?
This may be the most romantic of our 2009 year-end planning tips. But we’re not done yet!

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Making sure you get that year-end deduction

Tuesday, December 22nd, 2009 by Joe Kristan

When you're spending money to get a tax deduction for your business by the end of the year, you might as well make sure the deduction will hold up when your friendly neighborhood IRS agent comes calling. 

If you're a cash-basis taxpayer – if you aren't sure, check your business tax return or your 1040 schedule C or schedule F – you will need to show that you spent the money to claim the expense this year.  Some things to remember:

  • A credit card is as good as cash.  Better, even, because if you incur a business expense before the end of the year, you have your credit card statement to prove it.
  • If you mail a check for a business expense, the check needs to be in the mail and postmarked in 2009 to be a deductible 2009 expense.  If it's a big check, maybe you should spend a few bucks extra to send it Certified Mail so you can document the postmark.
  •  If you receive a check in the mail, it's taxable the day you receive it, even if you don't deposit it.
  • There is no "close is good enough" rule for cash basis taxpayers.  Just because you could have paid a bill doesn't get you a deduction if you didn't pay it before year-end.
  • Don't overdo it.  If you prepay expenses more than a year out, you don't get the deduction until the year to which the payment applies.

If you are an accrual-basis taxpayer, your big year-end issues come from related-party payments.   For example, a C corporation can only deduct payments to an over-50 percent owner if the payment is made before year-end.  If you and a family member both own stock, you combine your ownership to see if you own over 50 percent. For C corporation personal service corporations — doctors, lawyers, consultants, and accountants — that pay all of their earnings out as salary, this is a critical issue; any earnings left at year-end get taxed at a flat 35 percent federal rate.  S corporations and partnerships are related to all of their owners for purposes of taking deductions.  They are also related to anybody in the owner's family up to kissing cousins, more or less, including ancestors, lineal descendants, spouse and siblings.

If you are looking for a deduction from buying equipment or fixed assets — say, a Section 179 deduction or a bonus depreciation deduction — make sure that your asset isn't just purchased, but placed in service too, before year-end.  It doesn't count if it's sitting on the dock in the packing cases

This post, which originally appeared at IowaBiz.com, is part of our year-end tax tips series.

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Harvest those capital losses!

Friday, December 18th, 2009 by Joe Kristan

Just as a fair chunk of Iowa’s corn crop is still in the fields, lots of us have tax losses waiting to be harvested in our taxable investment portfolios. While farmers have to wait for the deep snow to go away to get their corn, you can harvest your tax losses with a call to your broker, or the touch of a cursor on your E-trade screen.
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Remember, individuals can deduct capital losses to the extent of your capital gains, plus $3,000. If you have sold stock at a gain this year or have capital gains from mutual fund distributions, tax on them is optional to the extent you can sell stocks at a loss before the end of the year. It’s a gimmee deduction if you keep a few tips in mind:
– You have to take the loss in a taxable account. A loss in an IRA or 401(k) plan doesn’t help you.
– Normally the “trade date” is the effective date for tax purposes, so you can sell a stock as late as December 31 this year and still deduct the loss on your 2009 1040.
– If you have a loss on a short sale, the tax law treats it as closing on the settlement date, not the trade date, so you can’t wait to the last minute to close a short sale to get a deduction.
– Watch out for the wash sale rules. If you buy the same stock within the 30 days preceding or following the sale of a loss stock, your loss is disallowed. This is true even if you sell from a taxable account and buy in an IRA.
Another installment in the Tax Update’s 2009 year-end tax planning series!

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Buy that car right now!

Friday, December 18th, 2009 by Joe Kristan

Because the above-the-line deduction for new car sales and excise taxes expires December 31.

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Should you start a qualified retirement plan before year-end?

Wednesday, December 16th, 2009 by Joe Kristan

The tax law has a menu of tax-favored retirement plans for entrepreneurs. The simplest ones, SEPs and IRAs, can be set up for 2009 as late as the tax return deadline — in the case of SEPs, the extended tax return deadline. But the most potentially lucrative plans — qualified pension or profit-sharing plans — have to be in place by year-end for contributions to be deducted on 2009 returns.
For a profitable entrepreneur with no employees, the “Solo-401(k)” may be the most lucrative retirement plan option. If you are profitable enough, you can make a deductible 2009 contribution to such a plan of the first $16,500 of your earnings, plus 20% of your earnings, if you are a Schedule C entrepreneur. The $16,500 piece makes for bigger contributions than would be available from SEPs or other plans for those with earnings under $245,000. That’s a nice deduction for just taking money from one pocket and putting it in your other pocket.
If the plan is fully executed in 2009, it can be funded as late as the extended due date of your 2009 return.
There are downsides to such plans. They are much more expensive to maintain than a SEP, and the benefits either have to be foregone or shared if you add employees. You don’t want to just jump into a qualified plan, but if you want to look into one for this year, you need to act quickly.
This is another installment in the 2009 Tax Update year-end tax tip series.

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